Why hotel rooms are becoming the hot new play for savvy real estate investors.

By Elizabeth Esfahani

March 16, 2006 11:03 PM EST

(Business 2.0) – Ever since Tony Kim flipped his "Starter Home" for an $80,000 profit six months after buying it, he's been on a perpetual hunt for new ways to milk the real estate market. He scored in the past five years with condos in Southern California and South Korea. Now he's chasing an intriguing new play: buying up individual hotel rooms.

At first it might seem that Kim needs to call room service for a little reality soup. But in this time of real estate bubbliness, Kim and a growing number of others are discovering that the peculiar practice of investing in hotel rooms--"condo hotels," as they're known in the business--can provide potentially lucrative opportunities outside the froth-filled traditional housing market. Over the past two years, Kim, a 43-year-old owner of beauty supply stores who lives in Omaha, Neb., has paid about $671,000 in out-of-pocket down payments for eight hotel rooms that are now valued at an estimated $6.7 million--about 40 percent more than their purchase prices.

The ability to buy ownership stakes in hotel rooms has been around for years. It's only recently become a popular way to finance new construction--and that's created investment opportunities. (A wealth of information can be found at condohotelcenter.com.) Buyers find it appealing because initial capital outlays tend to be modest, since you can invest early in yet-to-be-built hotels. Moreover, unlike with traditional condos or vacation homes, there's no upkeep for the finished room. In addition to being able to stay in their rooms whenever they want, buyers can make money by leasing out the units to others. Most hotel operators run services that will match rooms with customers and send a healthy fee to the room owner. James Dubois, a condo hotel investor in London, says he made a solid 6.7 percent return in the past year on his $410,000 purchase of a room by renting it out through the building's developer, GuestInvest.

The larger payoff can come by investing in rooms in hot locations and hoping they rise in value--Kim's specialty. In 2003 he put down a $10,000 deposit to reserve a small condo hotel room overlooking Lake Michigan in Chicago's Trump International Hotel & Tower. Over the next year, he put down an additional $79,000, or 15 percent of the nominal purchase price of $517,000. When the hotel building is completed, scheduled for 2007, he'll take out a mortgage. Today, based on the value of comparable units, Kim's Chicago studio is worth about $1 million. "The beauty of condo hotels is there's no mortgage to pay until it's done," Kim explains. "You get in early and sit on it while it appreciates."

Since that first foray, Kim has bought two more condo hotel rooms in Chicago, four in Las Vegas, and one in Toronto. The asking prices for his eight rooms totaled about $4.7 million. Though all the rooms are still under construction, the units today are worth an estimated $2 million more than Kim paid. Ultimately, Kim expects to sell some of the units to lock in the appreciation while retaining others for cash flow.

Joel Greene, president of Condo Hotel Center, says the big bet is that condo hotel rooms can be resold to affluent buyers looking for prestigious, no-hassle second or even third residences. Of course, investing in condo hotels does carry risks, especially given the long lag time (often four years or more) between the initial investment and the completion of a property. Ford advises would-be investors not only to obey the cardinal axiom of all real estate investing--location times three--but to home in on properties run by highly acclaimed hoteliers. That will at least minimize the chance that investments will go south. And even if they do, at least the investor won't end up on the street. "It's a calculated risk," Kim says. "But even if the worst-case scenario happens, I still have eight great hotel rooms to stay in."

THE ANGLE: Flipping Hotel Rooms

$

1 Put down a deposit for a room in a "condo hotel" that's just beginning construction.

FOR RENT

2 When the hotel is completed, rent out the room through the building operator.

VALUE

3 Or you can sell off the unit to cash in on any appreciation in market value.